Last week, Ben Carlson from A Wealth of Common Sense published an interesting article about how staying rich is harder than getting rich. He writes:
Research shows over 50% of Americans will find themselves in the top 10% of earners for at least one year of their lives. More than 11% will find themselves in the top 1% of income-earners at some point. And close to 99% of those who make it into the top 1% of earners will find themselves on the outside looking in within a decade.
It's great that so many people get to taste what it's like to earn a lot of money, if only for a little while. What's not so great is that as most people earn more, they spend more. But if you spend all (or most) of what you earn as you're surfing an income bubble, you can find yourself in trouble when that bubble bursts.
Carlson quotes a story about a couple that lived a lavish lifestyle because they were making a lot of money. When the income dried up, they realized they had nothing left. They were broke. Says the husband: "The money was just coming so fast and so easy that my ego led me to believe that, 'Oh, this is my life forever.'"
I've been thinking about that last line for a week now: "This is my life forever." This couple fell for a common (but seldom examined) mental trap: the forever fallacy. The forever fallacy is the mistaken belief that you will always have what you have today, that you'll always be who you are today.
The Forever Fallacy
It's easiest to see the forever fallacy at play in extreme cases. Take professional athletes, for instance.
In a 2009 Sports Illustrated article about how and why athletes go broke, Pablo S. Torre wrote that after two years of retirement, "78% of former NFL players have gone bankrupt or are under financial stress." Within five years of retirement, roughly 60% of former NBA players are in similar positions.
Fundamentally, the problem here is the forever fallacy. Athletes (and popular entertainers) tend to enjoy a few years during which they earn great gobs of money. The challenge is to figure out how to make five years of income last for fifty years. This never occurs to most of them. As the money is rolling in, it feels like the money will always be rolling in. When the income stops, the pain begins.
"[A pro athlete] can't live like a king forever," says Bart Scott in ESPN's Broke, a documentary about pro athletes and their money problems. "But you can live like a prince forever."
The forever fallacy doesn't just trap athletes and entertainers and lottery winners. It snares average folks like you and me too.
I'm sure we've all had friends who found themselves flush, whether from a windfall or from a raise at work. They succumb to lifestyle inflation, spending more as they earn more. They buy a bigger house, a new car, a boat. Then, without warning, something awful occurs and they're no longer rolling in dough. It felt like the good times would last forever -- but they didn't.
The forever fallacy manifests itself in lots of little ways too.
- When you choose not to keep an emergency fund because you've never needed one in the past, you're succumbing to the forever fallacy.
- When you take out a large mortgage, one that pushes the limits of your earning power, you're giving in to the forever fallacy.
- When you fund your lifestyle through debt, you're living in the forever fallacy.
The forever fallacy doesn't apply only to positive expectations. People also give in to the forever fallacy with negative expectations. They're trapped in a minimum wage job and project that they'll always be working minimum wage. They're in a shitty marriage and let themselves believe that they'll always be trapped in a shitty marriage. And so on.
The key thing to understand is that everything changes. You change. Your circumstances change. The people around you change. Nothing is forever. The challenge then is to balance this concept -- everything changes -- with living in the present. You must learn to enjoy today while simultaneously preparing for possible tomorrows.
I spend a lot of time talking with people who have retired early or are otherwise financially independent. From a purely anecdotal point of view, I'd say most of these folks are well-adjusted. They work to maintain balance in life, and especially with their personal finances.
That said, I've noticed that a lot of retirees -- early retired or otherwise -- struggle to know how much they should spend. I believe this dilemma exists for a couple of reasons:
- First is the life expectancy problem. You don't know how long you're going to live. If you did know the precise date of your death (or even the year of your death), retirement planning would be much easier. You'd be able to say, "Okay, I have ten years left and $300,000 in the bank. Based on that, I should be able to spend $30,000 per year." But you don't know when you're going to die, so a lot of retirement planning becomes guesswork.
- Second is the question of what your money is for? Do you want to leave a legacy for your children (or somebody else)? Do you want to maintain a chunk of change for possible end-of-life medical issues? Or do you want to use your wealth to live life to the fullest while you can? In my case, my ideal would be to die broke. If I could spend my very last penny on the last day of my life, that'd be perfect.
The general response to these two problems is to follow what has been dubbed the four-percent rule. Generally speaking, it’s safe to withdraw 4% from your portfolio every year without risk of running out of money. (There are a lot of caveats to this guideline. To learn more, follow that link to my Money Boss article -- or wait for that story to migrate to Get Rich Slowly in a few days!)
The AAII Journal -- the monthly magazine from the American Association of Individual Investors -- has published two articles in recent months about the problem of spending in retirement. Let's look at what they have to say.
Happy blogiversary! Twelve years ago today, I launched a humble little blog about personal finance -- this blog, Get Rich Slowly. It was meant as a way for me to share the things I was learning as I dug out of debt. It turned into so much more.
For the next couple of weeks, I'm on the road in the southeastern U.S., speaking to people about personal finance and meeting with readers.
This morning, for instance, I spoke to the 76 people attending Camp FI in Spring Grove, Virginia. My topic? No surprise: The importance of having purpose in your life. As you can see, I am a PowerPoint genius...
If you've spent any time reading my material, you know that I believe purpose is the foundation on which all plans -- financial and otherwise -- ought to be built. Purpose is a compass. It helps you set big goals, sure, but it also acts as a guide when times get tough. Your mother died? Your wife left? Your husband lost his job? If you know what your primary purpose is in life, these stressful events are much easier to deal with.
For this presentation, I added a new twist. You see, a lot of folks who are interested in money tend to pick things like "getting out of debt" and "becoming financially independent" as their purpose or mission. But I think these are poor choices.
I've seen far too many folks make debt elimination a goal -- then fall right back into debt once they've achieved it. And there are plenty of people who reach FI (or retire early) only to find they no longer know what to do. (It's like aiming to reach a certain weight instead of choosing to make lasting lifestyle changes that lead to weight reduction.)
Instead, I think it's important to recognize that your financial situation should be side effect of pursuing some greater purpose. Financial independence ought not be your aim; it's merely a means to an end.
When I speak about purpose (which is often), I tend to fall back to the George Kinder/Alan Lakein personal mission statement exercise. I feel like it's one of the best available tools for helping people find focus. But it's not the only tool.
Today, to celebrate this site's twelfth birthday, I want to present twelve alternative exercises for discovering your purpose and passion. If you've tried one (or more) of these without success, try another. One of them is sure to be useful for you.
Note: I've done my best to credit sources for these exercises. (Many come from Barbara Sher's excellent book Wishcraft, which is all about crafting the life you really want.) At the end of this article, I'll give you a list of recommended reading -- and tell you what I think is the single best book for discovering passion and purpose.
Your One-Hundred Word Philosophy
The first exercise is one I created myself. It's based on CrossFit's "world-class fitness in 100 words" statement. There's no time limit for this exercise, but it could take a while so be prepared.
Your aim is to write out your life philosophy in exactly one hundred words -- no more and no less. This can take any form you want, from a statement of values to a list of instructions. Begin by writing down your core beliefs and values. It might also be helpful to think about books that have had a big impact on your life or powerful advice you've received in the past. Based on your experience and beliefs, what is your life philosophy?
As an example, here's my own hundred-word philosophy, which I've written as instructions to myself:
Some of those admonitions are my own invention. Some come from books like The Four Agreements and The Power of Now. "Refuse to let fear guide your decision-making process," was advice from my girlfriend. "Create your own luck" is based on my friend Michelle's advice to "create your own certainty".
Again: Target one hundred words exactly. It'll force you to spend time thinking and editing and being introspective.
As you can see, I paid an artist friend to create a pretty letterpress poster of my 100-word philosophy, which I've hung on the wall here at home. I look at it every day. Obviously, you don't have to go that far.
At Get Rich Slowly, my goal is to help you make the best possible decisions with your income and spending. Having said that, we're all human. We all mistakes. We all do dumb things with money. And I feel like April Fools' Day is the perfect time to talk about some of the stupid things we've done in the past.
Let me give you an example (or three) from my own life.
To begin, I'll retell a classic tale of my financial foolishness, one that has delighted my readers for over a decade. It's all about how I paid $1500 for a "free" Frisbee.
The Not-So-Free Frisbee
On the first day of college, I opened my first bank account. The gym was filled with registration tables, not just for classes and clubs, but also for banks and credit cards. Since I was receiving a small stipend to cover living expenses, I needed a checking account.
The two banks vying for attention used different methods to attract students to their tables. A small local bank had a sign that promised "free checking". A large national bank gave away a Frisbee to anyone who opened an account. The choice seemed easy: I wanted the Frisbee.
I signed up for my checking account, deposited my money, and got my free Frisbee. I spent the afternoon on the quad tossing the disc back and forth with my roommates. When it was time for dinner, I took the Frisbee up to my room, put it in the closet, and never used it again. Ever. But I had that checking account for nearly two decades.
Classes started. I forgot about the Frisbee and the checking account. The next month, I received my first bank statement. There was a $5 service charge. It didn't seem like a big deal. I figured it was part of the package, part of being a grown-up. My parents had always paid a service charge on their checking account, and I expected I always would too.
For the rest of my college career, I paid $5 per month to maintain my checking account. When I graduated, I continued to pay $5 per month. During the 1990s, that fee increased to $8 per month, but I barely noticed.
In fact, I paid a monthly fee for checking from September 1987 until June 2004. For 202 months -- nearly seventeen years -- I paid for the privilege of writing checks. Then, when I started turning my financial life around, I left the major national bank and moved to a local credit union. I've had my checking account at that credit union for nearly fourteen years now and have never been charged a fee of any kind.
One foolish choice as I entered college cost me nearly $1500 -- enough to buy about one hundred Frisbees. And that's just one of the foolish financial choices I've made in my life.
What do you want out of life?
Maybe that seems like a strange question. What do goals have to do with getting rich slowly? Everything! Having a personal mission is key to running your life like a business. Your goals help you decide how to spend your time and money.
When I think about the difference between people with purpose and people without, I always think of my friend Paul.
Twenty years ago, as I was swimming in self-induced debt, Paul was living a bare-bones lifestyle that seemed ridiculous to me. He didn't own a television. He had few books and little furniture. His only indulgence seemed to be a collection of bootleg U2 albums.
"How can you live like this?" I asked him during one visit. "Where's all of your Stuff?"
He shrugged. "I don't need a lot of Stuff, J.D. Stuff isn't important. It gets in the way of the things I really want."
I didn't know what he meant. To me, life was all about the Stuff. I had hundreds of CDs and thousands of books. I had a TV, a stereo, a house, and a car. I wanted more.
Paul didn't have any of these, but he had things I didn't have. He had happiness. He had freedom. He had money. He had goals.
This guest post from Cody is part of the "money stories" feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success -- or failure. These stories feature folks from all stages of financial maturity.
In January, I attended Camp FI in Florida. While most of the attendees were thirty- or forty-somethings pursuing early retirement, one young man stood out. We were all amazed at the presence of Cody Berman, a 21-year-old hustler who defies the Millennial stereotype. Cody works hard, saves tons, and has a vision for his future. I asked if he'd be willing to share his story with GRS readers. Here it is.
From a young age, my parents instilled the value of saving into me. Throughout my early childhood, my father would match my contributions to my savings account dollar for dollar. This made me excited to save birthday money and miscellaneous earnings because the money would double. (Thanks, Dad!)
When I write about retirement and retirement planning, I frequently mention that I aim for my savings and investments to last another thirty years. So, for instance, when I use retirement calculators to determine how long my nest egg will last, I use 78 as my projected age of death. Several readers have written to ask how I arrived at this number.
For example, Richard wrote:
I’m wondering why you’re only projecting out 30 years. You’re only 48. I’m 54 (and retired) and, in my projections and calculations, I go out 40 years. I probably don’t need to plan out that far, but you never know. My last surviving grandparent died just a couple years ago at age 99.
This is a great question. In fact, I believe life expectancy is the most critical factor in determining how much money you need to save -- and how much you can spend. Unfortunately, it's also the variable that's most difficult to calculate with any kind of precision.
Why is Life Expectancy so Important?
When the mainstream media publishes an article about early retirement, the comments are filled with folks who say things like, "These people are cheap. I could never live like that. Besides, what if they drop dead tomorrow? Then what good is all of that money? YOLO!"
On the other hand, early retirement forums are filled with people who go to the opposite extreme. "OMG! I can't believe you're only expecting to live until age 90. What about modern medicine? What about gene therapy? What if you live to 108? Boy, then you're going to be sorry you didn't save more!"
Both sides make valid points.
- If your assumptions about life expectancy are too optimistic, you risk not making the most of the money you've saved. If you budget as though you were going to live to 95 but end up dead by 65, you'll have a lot of money that essentially goes to waste -- money you might have used to do the things you'd always dreamed of doing.
- If your assumptions about life expectancy are too pessimistic, you risk running out of money. If you make choices based on the idea that you'll die at age 65, for example, but live until 95, you'll end up broke. You'll spend decades eating beans and rice.
Here's the bottom line: If you knew when you were going to die, you could calculate how much money you'd need to get from now to then.
Pretend that next week Elon Musk announced he'd developed the Methuselah, a machine that can tell users the precise date and time of their death. It's 100% accurate and somehow can even account for accidental death. When the Methuselah comes on the market, you try it just for kicks. It tells you that you'll die on 06 November 2034. You have about seventeen years left to live.
Based on that information, you'd be able to calculate with great precision how much money you'd need in order to make it to your date of death. You'd know whether you need to continue working or could call it quits right now. You'd know whether you had enough saved to travel the world in luxury or if you needed to live a more meager existence.
Unfortunately -- or fortunately, depending on your point of view -- there isn't a way to tell with any precision how much longer you have to live. Elon Musk hasn't developed the Methuselah machine. (Yet.) All you can do is make an educated guess.
How to Determine Life Expectancy
One basic way to estimate your time remaining is to consult an actuarial life table. The U.S. Social Security Administration, for instance, has a basic period life table that shows how much time the average person has left to live based on their current age. A 48-year-old man like me can expect to live another 31.32 years -- until I'm 79.
My cohorts and I each have a 0.4167% chance of dying this year. Of 100,000 of us born in 1969, 93,759 are still alive.
Nearly everyone I know wants to become financially independent, to retire early. But most folks have no idea how to do so. The method I describe in this article is simple to understand, although it might be tough to implement. I call it the "Money Boss method".
With the Money Boss method, you manage your personal accounts as if you were managing a business. Doing so allows you to maximize profit and pursue Financial Independence – or any other any other money goal you choose.
For more on this concept, check out the Get Rich Slowly course, which teaches you how to become the CFO of your own life.
Financial Independence occurs when you’ve saved enough to support your current spending habits for the rest of your life without the need to earn more money. You might choose to work for other reasons – such as passion or purpose – but you no longer need a job to fund your lifestyle.
To achieve Financial Independence – or achieve other money goals – heed the basic rule of personal finance: To build wealth, you must spend less than you earn. Forget the standard advice to save 10% or 20% of your income. To be a money boss, practice extreme saving. Your goal should be to save half of everything you earn. (And more is better.)
Sound impossible? It’s not. Most of the advice here at Get Rich Slowly 3.0 is built around helping you save half. To do so, you’ll need to conduct a three-pronged attack.
This week's reader question is an example of why I love the "ask the readers" feature here at Get Rich Slowly. I get to write about situations that otherwise would never occur to me!
Karen writes because she's having trouble with two of her kids:
I keep getting sucked into helping two of our children who can't seem to get it together. I don't want to see them on the street but they keep making dumb mistakes. What do you do when faced with a kid going to prison for lack of funds to pay fines? What about a different kid who is at risk of becoming homeless? This is tough to watch. (I really prefer dogs!) When does helping a family member financially become enabling? Or is it always enabling?
This article is part of relationship month at Get Rich Slowly.
As a dental hygienist, my girlfriend Kim meets lots of interesting people and has lots of interesting conversations. Last week while cleaning a patient's teeth, the topic turned to pets.
"Two years ago, we didn't have any animals," Kim told her patient. "We were on the road in an RV. Today? Today we have three cats and a dog. Honestly, I'd be fine with more animals. We love them."
"We love our animals too," her patient said. "We might love them a little too much. Recently, we moved. I'd say 90% of that decision was based around our dog. Is that wrong?"
Kim laughed. "It's not wrong," she said. "We did something similar ourselves."
Pets are expensive, Kim and her patient agreed. Are they worth it? Yes. Yes, they are. But as with most things in life, pet costs can quickly get out of control if you let them. It's important to find a balance between the needs of your animals and your own financial well-being.
For the past two years, Kim and I have been working to find where that balance is for our family.
Near the end of our 15-month RV trip around the United States, Kim and I stopped to visit my cousin in Tahlequah, Oklahoma. For a week, we left behind modern life to enjoy the slower pace in this isolated 100-acre creek hollow. We enjoyed the communal meals (during which several families dined together at once). We marveled at the light show provided each evening by the fireflies. (There are no fireflies in Oregon.) And we lavished love on all of the animals: the cows, the chickens, the cats, and the dogs.
Especially the dogs.
A few weeks before we arrived, one of the farm dogs had given birth to a litter of puppies. Kim fell in love with them. "I think I want to take one home with us," she said.
"Maybe on our way back through," I said, trying to be the voice of reason.
Our plan was to turn east toward Memphis, Mississippi, and Alabama. We'd then drop down to the Gulf Coast, cut over to New Orleans, then make our way into Texas. "Dallas isn't far from here," I said. "When we get there, then we can decide whether or not we want a dog."
For the next month, Kim and I spent our evenings reading about dogs. Both of our families had dogs when we were growing up, but neither of us had owned one as an adult. We learned about different training philosophies. We discussed discipline. We discussed costs. We discussed what adding an animal would mean for our relationship as a couple.
"Do you still want the dog?" I asked Kim a few weeks later as we pulled into Dallas.
"Yes, I do," she said.
After spending a few days with my pal PT (from PT Money), we returned to my cousin's farm in Tahlequah. Kim's puppy was still there. "Hello, Tahlequah," Kim said as she petted the pup. "How would you feel about moving to Oregon?"
Tahlequah seemed happy about the idea. Kim was even happier. She turned to me and smiled. "With this dog, I thee wed," she said. And that's how we entered a new phase in our lives.